Chesapeake Energy Has Improved Financially: Credit Suisse

Chesapeake Energy Corporation (NYSE:CHK) has been facing serious debt problems, as covered in some of our articles. The company’s increasing debt had put it a high risk, with regard to the principle of going concern, but now, according to Credit Suisse (NYSE:CS), this burden has eased.

This comes after the company’s Q2, 2012 results, whereby the company announced definitive agreements for some $6.9 billion in asset monetizations , which significantly reduces the going concern risk. It would be such a blow in the teeth for the oil and gas industry in the U.S., if the country’s second largest oil and gas company, Chesapeake Energy, which by the way, only comes after Exxon Mobil Corporation (NYSE:XOM), ceased to be a going concern.

However, Credit Suisse (NYSE:CS) Equity Research writes, “while anticipated proceeds from the much ballyhooed Permian sale process were light, the planned sale of E&P assets to Chevron, Shell, and EnerVest should eliminate concerns related to buyer financing, and Chesapeake Energy Corporation (NYSE:CHK)’s ability to close the transactions in Q412.”

The analysts first feared that the high mid stream proceeds would likely result in very high fees, but this never turned out to be the case, because the fees are marked to market. Additionally, the analysts notes, now that Chesapeake Energy Corporation (NYSE:CHK) has overcome one of its main challenges with the sale of assets, the focus turns to the fundamental question of the increasing costs of drilling oil and gas.

The company, among several other U.S. oil and gas companies, and even around the world, have been facing the challenge of increased cost in mining the precious commodity. Additionally, its stretched balance sheet, just as we covered earlier, and again coupled with declining gas prices, leaves little room for Chesapeake Energy Corporation (NYSE:CHK) to rely on its operations in funding the projects.

Credit Suisse analysts foresee constraints befalling Chesapeake Energy’s development plans, if gas prices don not rebound in the near term. For this reason, the analysts have maintain their rating on the stock at Neutral.

While the assets sale at Utica, are likely to bring the company cash proceeds of around $6.9 billion, which are expected to start flowing in from the current Q3, through Q4, a majority of it will go towards settlement of outstanding term loans. At least $4 billion will be directed to this course, notes CS.

The Company is on track in reaching its divestment target of between $13-$14 billion, by the close of this year, as it has already racked up 85% of it. The sale of the $6.9 billion worth of assets will bring its divestment proceeds $11.6 billion, and with the divestment of its Mississippi assets still on going, it is very much likely that the company will meet its target of between $13-14 billion, notes CS.

However, is variances on targets and actuals are hardly anything to go by, the company could still be facing a stiff challenge in what it receives from the divestment, as witnessed in one of its assets sales. Chesapeake Energy Corporation (NYSE:CHK) had planned to collect proceeds of between $6 and $8 billion from its Permian assets sales, only to receive $3.3 billion.

Finally, the company is yet to close its 2013 funding gap, which currently stands at $3.3 billion, although through asset sales, it has managed to bridge the 2012 gap. It hopes to divest $4.2 to $5 billion in 2013, and CS believes that the company is moving in the right direction.

We have covered several articles on Chesapeake Energy Corporation (NYSE:CHK) project developments, including asset sales, and the company’s activity in divestment has been intense in 2012, which according to CS, has helped ease the going concern risk. However, the macroeconomic factor of low gas prices, along with the rising cost of drilling, coupled with an overstretched balance sheet, still raises a lot of questions over the company’s funding sources. The sale of assets in 2013, would definitely give a much needed boost, but the question is, will that be enough?

The company has attracted a host of Activists investors, in the likes of Carl Icahn, who as of June 30th had 8.9% stake, while Daniel Loeb has already bought much of Chesapeake’s debt. Historically, activists investors have had a huge impact in helping turn around companies, especially those that languish in debt, or struggling management. All we can do is wait and see how all this unfolds in the near future.

At the time of this writing, Chesapeake Energy Corporation (NYSE:CHK) was trading at $20.45, up $0.55 per share, or 2.76% increase from yesterday’s close.

Disclosure: The Author of this article holds no position in any of the company’s mentioned.

Author: Sheeraz RazaSheeraz is our COO (Chief - Operations), his primary duty is curating and editing of ValueWalk. He is main reason behind the rapid growth of the business.
Sheeraz previously ran a taxation firm. He is an expert in technology, he has over 5.5 years of design, development and roll-out experience for SEO and SEM. - Email: sraza(at)valuewalk.com